S&P Overbought But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 11, 2021.

Stocks closed at a record high Friday, after staging a comeback as President-elect Joe Biden talked up his spending-fueled plans to boost the recovery at a time when the virus continues to spread.   For the day, the Dow Jones Industrial Average added 0.2 percent to 31,097.97. The S&P rose 0.6 percent to 3,824.68, and the Nasdaq Composite popped 1 percent to 13,201.98.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 21.56.

Financials were weighed down by a fall in banking stocks ahead of their earnings slated for next week.  JPMorgan Chase (JPM) was flat, Citigroup (C) and Wells Fargo (WFC) was down 1 percent.  As such, the Financial Select Sector SPDR Fund (XLF) closed slightly below the flat line on the day but is up above 5 YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Financial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  XLF has been on a tear in recent days after breaking out above the 4-year moving average in early November.  Last week’s rally pushed the ETF up against the prior high set in early 2020.  The overall technical backdrop remains supportive of further advance.  So it seems to us that XLF will climb to new high as soon as it works off excessive optimism.   A close above 31.30 on a weekly closing basis will confirm this and trigger acceleration toward the 38 zone, or the 127.2% Fibonacci extension.

XLF has support just below 29.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed January 6, 2021 from bearish (sell) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P continues drifting higher after breaking out above the important sentiment 3800 mark on Thursday.  This week’s rally pushed the index toward the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions. The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

Money Flow measure is at the highest level going back to early 2019, indicating a strong net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

Short-term trading range: 3760 to 3870.  S&P has support near 3760.  Below it, a more significant support lies at the important sentiment 3700 mark.  Resistance is around 3870.  A sustain advance above that level has measured move to around 4000.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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